Goldman Sachs upgrades India to 'market weight' on Modi effect

Even as retail investors continue to shy away from the recent rally in equities, global investors seem to believe that things are set to change for the better in India.

So far the only evidence has been the liquidity ($3.5 billion came into Indian equities in September and October), but now official upgrades too have started. Goldman Sachs on Tuesday changed its stance on India in a report titled "Modi-fying Our View: Raise India to Market Weight". One only hopes that the market's enchantment with Modi is shared by the country's electorate as well, or else the sentiment could turn for the worse as it had in May 2004 when the UPA coalition came to power with the socialist parties.

However, for now, it's time to celebrate the spectacular rise in the Sensex and the Nifty's lifetime highs.

Goldman Sachs has cited several reasons for the change in its outlook. The reasons are -- politics, macro and micro developments.

The report, which is authored by Timothy Moe and Sunil Koul, Richard Tang, Kinger Lau and Ketaki Garg, says: "Following a detailed set of meetings in Delhi and Mumbai, we believe it is appropriate to raise our investment stance, recognizing that the equity market has risen sharply from three quarter lows. The key reasons: 1) Optimism over political change, led by BJP’s prime ministerial candidate Modi, is dominating economic concerns. 2) External capital account pressures have moderated, at least for now. 3) There are early signs of cyclical pick up and structural improvement. 4) The earnings outlook is stabilizing and we have raised our CY2014 EPS growth forecast from 8% to 11%. 5) Midrange valuations are not a constraint if fundamentals continue to stabilize; midcaps trade at a 30% discount to the broad market. 6) Retail redemption pressure could moderate, which could improve the equity demand/supply balance."

The Goldman outlook could be the beginning of upgrades as pockets of improvement are also visible in the macro-economic situation.